Vladislav Vorotnikov , Russia Correspondent05.12.21
The Russian coatings industry may face a perfect storm in 2021 with relatively low demand on the key markets, skyrocketing prices for raw materials, changing legislation, and on top of that, new Western sanctions against the country’s economy.
Raw material prices concerning
A sharp rise in prices for raw materials is one of the most distressing factors for the Russian coatings producer. Russian coatings companies import roughly 40% of raw material. The ongoing downward rally of the Russian ruble’s exchange rate coupled with the rise in prices on the global market causes strong volatility on the country’s raw materials market.
“The current situation with the rise in prices for raw materials is very alarming, including from the point of view of ensuring the quality and safety of the coatings,” said Sergei Fedotov, president of the Russian Coatings Quality Association. “To solve the problem of raw material security in the industry, some government support is needed.”
Some progress in the area of raw materials import has been seen – in particular, several years ago, when Russian company Gazprom opened a plant for the production of acrylic acid and butyl acrylate in the Republic of Bashkiria. At the investment cost of Rub40 billion ($650 million), the facility releases 80,000 tons of acrylic acid, 35,000 tons of ice acrylic acid, and 80,000 tons of butyl acrylate per year.
The Russian major oil producer Tatneft recently got a green light from the national technical regulator Glavgosexpertiza to build a maleic anhydride plant in the Tatarstan Republic for Rub6.5 billion ($90 million). Tatneft expects the plant with a production capacity of 50,000 tons per year to become operational in 2023.
However, some companies producing raw materials for the Russian coating industry are experiencing problems. In particular, Crimean Titan – the largest supplier of titanium dioxide to the country’s market – was blamed for causing environmental pollution in its region, and for this reason, temporarily stopped operation.
It is believed that the main reason for the pollution is a water shortage Crimea is suffering from. Before the Russian annexation of Crimea, a canal diverting water from the Dnieper River in mainland Ukraine had fed the Crimean Titan’s waste pond during dry summers. Ukraine cut this water supply, drying up the pond, concentrating the acid, which caused a threat to the environment.
Crimean Titan recently announced plans to commence large-scale staff cuts, although there is no information on how they could affect the plant’s
production performance.
Changing legislative environment
Russian coatings producers reportedly are annoyed over a lack of state support in the industry, according to local newspaper St. Petersburg Vedomosti. Not only are there currently no special measures aimed at supporting domestic producers, but also, in 2020, a new government decree equalized in right Russian companies and foreign manufacturers with localized capacities.
Under this decree, even those foreign companies who created primitive mixing of raw materials on the Russian ground can obtain a status of Russian Product for their coatings.
“According to local market players, such an approach intensifies competition with foreign manufacturers and hinders the development of Russian coating manufacturers, depriving them of their motivation,” the newspaper reported.
Obtaining the Russian Product status paves the way for foreign companies to claim the form of state aid as local businesses.
However, more importantly, in 2021, a long-awaited Eurasia Economic Union’s technical regulation On Coatings Safety may be finally adopted.
This regulation has been under development for several years and was set to be adopted in 2020. To some extent, the delay is associated with the COVID-19 pandemic.
Russian market participants raised concerns that with this regulation, the authorities could introduce new standards of coatings production, forcing companies to adjust their production process under new requirements.
The new regulation is expected to introduce stricter rules over lead content in coatings. The Russian coatings industry has been regularly criticized by local environmentalists for using lead, making coatings dangerous to consumers.
“The most effective way to prevent the use of lead in paints is to enact national laws and legally binding standards prohibiting the use of lead additives in coatings. At a minimum, countries should stop the production, import, and sale of household decorative lead coatings and consider limiting lead in all types of coatings, including paints for industrial use,” said Olga Speranskaya, co-chairman of the Russian environmental organization Ecosoglasie.
Unstable demand
During the pandemic, the demand for coatings on the Russian market shrunk by 6% to 7%, said Valery Abramov, general director of the JSC Russian Coatings, citing local analysts.
Due to the Russian population’s falling purchasing power, the demand for building materials has dropped and shifted towards the cheaper segments, he added. The crisis was very painful for the automotive industry, industrial and civil construction.
Since the beginning of 2021, Russia has some of the softest quarantine regimes in Europe. Mass vaccination with a Sputnik V vaccine is likely to facilitate further easing restrictions. However, it seems that not all segments, not all Russian coating-consuming industries, are benefiting from this situation.
According to the Association of European Businesses (AEB) statistics, the sales of new cars and light commercial vehicles in Russia during January-March 2021 declined by 2.8% year-on-year making 387,300 units.
“In general, the market situation is of no surprise. Purchase interest slightly decreases while prices increase, in some cases, there is still a deficit in the offer of certain models. Uncertainty with the disposal fee increase does not help the market either. The mass segment is slowing down most of all,” said Thomas Staertzel, chairman of the AEB Automobile Manufacturers Committee.
For comparison, the global automotive market experienced a 21.9% rebound in sales in the first quarter of 2021, and a 52.7% in March of 2021, the Russian analytical agency Avtostat estimated.
The picture could improve in the course of the next few months, AEB analysts added.
Things look better in the Russian construction industry in spite of labor shortage and some other problems the industry had to encounter during the pandemic.
“In 2020, the residential housing commissioning amounted to 82.2 million square meters, which is 143,000 square meters higher compared to 2019,” Deputy Prime Minister of the Russian Federation Marat Khusnullin said. “We were also able to establish reserves for the future, increasing the volume of issuing new building permits by 17% compared to 2019.”
At the end of 2020, the number of permits issued for the construction of apartment buildings increased to 28.2 million square meters, 9.6% higher than in 2019. This looks promising from the point of view of the demand for coatings.
Swiftly imposed sanctions
The U.S. sanctions against Russia are not only not weakening but are taking on new forms. There are threats heard now to disconnect Russia from SWIFT, the global interbank communication system.
Russia has its System for Transmitting Financial Messages (SPFS) developed and launched in 2014. After disconnecting from SWIFT, domestic banks will switch to this system, ensuring that the country’s economy would not stop completely. However, for international payments, the SPFS is not yet an adequate replacement.
A country’s disconnection from SWIFT means that the country’s business and private citizens lose an opportunity to send or receive payments. Giving a strong import-dependence of the Russian coatings industry on imported raw materials, this would be a low blow.
There are hopes that the Russian coating industry would not be completely isolated. SPFS is set to be linked with the Chinese cross-border interbank payment system CIPS and India’s future payment mechanism. The Russian payment system will also work with Iran’s SEPAM.
President Putin’s press secretary Dmitry Peskov recently said he doesn’t exclude the possibility of Russia being unplugged from the SWIFT network.
The Russian government is experimenting with currency and blockchain-based solutions that would serve as an alternative to the SWIFT payment system, Russia’s deputy foreign minister Alexander Pankin said.
In the context of the mounting U.S. sanctions, the Russian coatings producers association Centrlack questioned approving PPG’s takeover of Tikkurila.
Approval was granated by the European Commission, the Ministry of Economic Affairs and Employment of Finland. As approval for the acquisition of Tikkurila’s shares from the Federal Antimonopoly Service of Russia still remains pending, PPG extended the offer period to May 11.
“In the end, we have an interesting situation – the Americans are introducing new sanctions against Russia, and the Americans are asking Russia to approve a deal that would make it possible to receive even bigger profits from the Russian market and the Eurasia Economic Union countries for the leading U.S. company in the coating industry.
The near future will show how and in whose interests the Russian government would act,” Centrlack said in a statement on its website.
Raw material prices concerning
A sharp rise in prices for raw materials is one of the most distressing factors for the Russian coatings producer. Russian coatings companies import roughly 40% of raw material. The ongoing downward rally of the Russian ruble’s exchange rate coupled with the rise in prices on the global market causes strong volatility on the country’s raw materials market.
“The current situation with the rise in prices for raw materials is very alarming, including from the point of view of ensuring the quality and safety of the coatings,” said Sergei Fedotov, president of the Russian Coatings Quality Association. “To solve the problem of raw material security in the industry, some government support is needed.”
Some progress in the area of raw materials import has been seen – in particular, several years ago, when Russian company Gazprom opened a plant for the production of acrylic acid and butyl acrylate in the Republic of Bashkiria. At the investment cost of Rub40 billion ($650 million), the facility releases 80,000 tons of acrylic acid, 35,000 tons of ice acrylic acid, and 80,000 tons of butyl acrylate per year.
The Russian major oil producer Tatneft recently got a green light from the national technical regulator Glavgosexpertiza to build a maleic anhydride plant in the Tatarstan Republic for Rub6.5 billion ($90 million). Tatneft expects the plant with a production capacity of 50,000 tons per year to become operational in 2023.
However, some companies producing raw materials for the Russian coating industry are experiencing problems. In particular, Crimean Titan – the largest supplier of titanium dioxide to the country’s market – was blamed for causing environmental pollution in its region, and for this reason, temporarily stopped operation.
It is believed that the main reason for the pollution is a water shortage Crimea is suffering from. Before the Russian annexation of Crimea, a canal diverting water from the Dnieper River in mainland Ukraine had fed the Crimean Titan’s waste pond during dry summers. Ukraine cut this water supply, drying up the pond, concentrating the acid, which caused a threat to the environment.
Crimean Titan recently announced plans to commence large-scale staff cuts, although there is no information on how they could affect the plant’s
production performance.
Changing legislative environment
Russian coatings producers reportedly are annoyed over a lack of state support in the industry, according to local newspaper St. Petersburg Vedomosti. Not only are there currently no special measures aimed at supporting domestic producers, but also, in 2020, a new government decree equalized in right Russian companies and foreign manufacturers with localized capacities.
Under this decree, even those foreign companies who created primitive mixing of raw materials on the Russian ground can obtain a status of Russian Product for their coatings.
“According to local market players, such an approach intensifies competition with foreign manufacturers and hinders the development of Russian coating manufacturers, depriving them of their motivation,” the newspaper reported.
Obtaining the Russian Product status paves the way for foreign companies to claim the form of state aid as local businesses.
However, more importantly, in 2021, a long-awaited Eurasia Economic Union’s technical regulation On Coatings Safety may be finally adopted.
This regulation has been under development for several years and was set to be adopted in 2020. To some extent, the delay is associated with the COVID-19 pandemic.
Russian market participants raised concerns that with this regulation, the authorities could introduce new standards of coatings production, forcing companies to adjust their production process under new requirements.
The new regulation is expected to introduce stricter rules over lead content in coatings. The Russian coatings industry has been regularly criticized by local environmentalists for using lead, making coatings dangerous to consumers.
“The most effective way to prevent the use of lead in paints is to enact national laws and legally binding standards prohibiting the use of lead additives in coatings. At a minimum, countries should stop the production, import, and sale of household decorative lead coatings and consider limiting lead in all types of coatings, including paints for industrial use,” said Olga Speranskaya, co-chairman of the Russian environmental organization Ecosoglasie.
Unstable demand
During the pandemic, the demand for coatings on the Russian market shrunk by 6% to 7%, said Valery Abramov, general director of the JSC Russian Coatings, citing local analysts.
Due to the Russian population’s falling purchasing power, the demand for building materials has dropped and shifted towards the cheaper segments, he added. The crisis was very painful for the automotive industry, industrial and civil construction.
Since the beginning of 2021, Russia has some of the softest quarantine regimes in Europe. Mass vaccination with a Sputnik V vaccine is likely to facilitate further easing restrictions. However, it seems that not all segments, not all Russian coating-consuming industries, are benefiting from this situation.
According to the Association of European Businesses (AEB) statistics, the sales of new cars and light commercial vehicles in Russia during January-March 2021 declined by 2.8% year-on-year making 387,300 units.
“In general, the market situation is of no surprise. Purchase interest slightly decreases while prices increase, in some cases, there is still a deficit in the offer of certain models. Uncertainty with the disposal fee increase does not help the market either. The mass segment is slowing down most of all,” said Thomas Staertzel, chairman of the AEB Automobile Manufacturers Committee.
For comparison, the global automotive market experienced a 21.9% rebound in sales in the first quarter of 2021, and a 52.7% in March of 2021, the Russian analytical agency Avtostat estimated.
The picture could improve in the course of the next few months, AEB analysts added.
Things look better in the Russian construction industry in spite of labor shortage and some other problems the industry had to encounter during the pandemic.
“In 2020, the residential housing commissioning amounted to 82.2 million square meters, which is 143,000 square meters higher compared to 2019,” Deputy Prime Minister of the Russian Federation Marat Khusnullin said. “We were also able to establish reserves for the future, increasing the volume of issuing new building permits by 17% compared to 2019.”
At the end of 2020, the number of permits issued for the construction of apartment buildings increased to 28.2 million square meters, 9.6% higher than in 2019. This looks promising from the point of view of the demand for coatings.
Swiftly imposed sanctions
The U.S. sanctions against Russia are not only not weakening but are taking on new forms. There are threats heard now to disconnect Russia from SWIFT, the global interbank communication system.
Russia has its System for Transmitting Financial Messages (SPFS) developed and launched in 2014. After disconnecting from SWIFT, domestic banks will switch to this system, ensuring that the country’s economy would not stop completely. However, for international payments, the SPFS is not yet an adequate replacement.
A country’s disconnection from SWIFT means that the country’s business and private citizens lose an opportunity to send or receive payments. Giving a strong import-dependence of the Russian coatings industry on imported raw materials, this would be a low blow.
There are hopes that the Russian coating industry would not be completely isolated. SPFS is set to be linked with the Chinese cross-border interbank payment system CIPS and India’s future payment mechanism. The Russian payment system will also work with Iran’s SEPAM.
President Putin’s press secretary Dmitry Peskov recently said he doesn’t exclude the possibility of Russia being unplugged from the SWIFT network.
The Russian government is experimenting with currency and blockchain-based solutions that would serve as an alternative to the SWIFT payment system, Russia’s deputy foreign minister Alexander Pankin said.
In the context of the mounting U.S. sanctions, the Russian coatings producers association Centrlack questioned approving PPG’s takeover of Tikkurila.
Approval was granated by the European Commission, the Ministry of Economic Affairs and Employment of Finland. As approval for the acquisition of Tikkurila’s shares from the Federal Antimonopoly Service of Russia still remains pending, PPG extended the offer period to May 11.
“In the end, we have an interesting situation – the Americans are introducing new sanctions against Russia, and the Americans are asking Russia to approve a deal that would make it possible to receive even bigger profits from the Russian market and the Eurasia Economic Union countries for the leading U.S. company in the coating industry.
The near future will show how and in whose interests the Russian government would act,” Centrlack said in a statement on its website.